Question 1

What does aggregate demand management mean?

Accepted Answer

Aggregate demand management is the government's attempt to control the aggregate level of spending in the economy.During periods of recessions,government spending attempts to induce individuals and the private sector to spend.

Question 2

Consider the following diagram
   Demonstrate graphically and explain verbally the impact of a decrease of 50 in government spending on the AD curve in the diagram when the multiplier is 3.

Accepted Answer

The total impact of the decrease of 50 of government spending is a leftward shift of the AD curve from AD₀ to AD₁.This shift occurs as a result of two things.The initial effect is the decrease in government spending of 50.This can be viewed as the movement along the P₀ line from point A to point B.As a result of the initial decrease in spending,the multiplier process takes over.The multiplier effect is illustrated by the movement along the P₀ price line from point B to point C.Using a multiplier of 3 this results in a total drop in real output (A to C)of 150.

Question 3

What are the three ways that falling asset prices can affect aggregate demand?

Accepted Answer

A fall in asset prices can decrease expectations about the future growth of the economy.A fall in asset prices can decrease people's perceptions of their wealth.A fall in asset prices can undermine the financial system.

Question 4

Suppose that in order to win voter support for reelection,an incumbent President pushes a tax cut through Congress.What impact will this have on the AD curve?

Accepted Answer

A cut in taxes will give peopl

Question 5

Why is the short-run aggregate supply (SAS)curve upward sloping?

Accepted Answer

The SAS is upward sloping because,other

Question 6

Demonstrate graphically and explain verbally the comparison of the impact of a drop in the price level on the shape of the aggregate demand curve when the multiplier effect is positive to when it is zero.

Accepted Answer

With a multiplier effect of zero the AD

Question 7

Using an AS/AD diagram,demonstrate graphically and explain verbally the short-run impact on the price level and real output of an increase in the labor productivity schedule.

Accepted Answer

Our initial equilibrium is point A on AD

Question 8

What are feedback effects,and how does the AS/AD model incorporate them?

Accepted Answer

Feedback effects occur when people belie

Question 9

Suppose the economy is in an inflationary gap,as illustrated by point A in the diagram below:
   Suppose that everyone knows that inflationary gaps lead to cost pressures that will eventually result in the price level rising.Since people expect the price level to rise soon,suppose they increase their buying now (before prices rise).Demonstrate graphically and explain verbally how this will complicate the economy's adjustment story described in the text.

Accepted Answer

When there is an inflationary gap wage,t

Question 10

Demonstrate graphically and explain verbally the case of an inflationary gap.Describe the forces in the economy that will result in the gap closing itself.

Accepted Answer

Initially we are at point A with a price

Question 11

Explain why the long-run aggregate supply (LAS)curve is vertical.

Accepted Answer

The LAS curve is vertical because at pot

Question 12

What does it mean if the economy becomes dynamically unstable?

Accepted Answer

This means that a negative sho

Question 13

Explain why the aggregate demand curve is downward sloping.(As the price level falls,the quantity of real output demanded increases.).List five factors that might cause the AD curve to shift outward

Accepted Answer

Three reasons why the aggregate quantity

Question 14

What is the difference,in terms of the time frame of analysis,between Classicals and Keynesians?

Accepted Answer

The Classical economists focus

Question 15

Explain why the long-run aggregate supply (LAS)curve is vertical.What determines the position of the LAS curve?

Accepted Answer

The LAS curve is vertical because at pot

Question 16

Canada is the largest trading partner of the U.S.Suppose the U.S.economy keeps growing.What will happen to the AD curve for Canada?

Accepted Answer

As the U.S.economy keeps growi

Question 17

Describe two ways in which the macro AS/AD model differs from the micro supply and demand model.

Accepted Answer

The first difference deals with what is

Question 18

Keynes did not agree with the way the Classical economists described the workings of the economy.What was the essence of his thinking?

Accepted Answer

Distilled to its essence,Keynes' thinkin

Question 19

In 2008,the world experienced a global recession.Why would the U.S.be concerned about other parts of the world,particularly Japan,Western Europe,Canada,and Mexico,having recessions?

Accepted Answer

When other countries are experiencing a

Question 20

Assuming the economy is in long-run equilibrium,using an AS/AD diagram,demonstrate graphically and explain verbally the long-run impact on the price level and real output of an expectation by business executives of a recession in the near future.

Accepted Answer

If business executives expect a recessio

Exam 10: The Aggregate Demand-Aggregate Supply Model

What does aggregate demand management mean?

Consider the following diagram Demonstrate graphically and explain verbally the impact of a decrease of 50 in government spending on the AD curve in the diagram when the multiplier is 3.

What are the three ways that falling asset prices can affect aggregate demand?

Suppose that in order to win voter support for reelection,an incumbent President pushes a tax cut through Congress.What impact will this have on the AD curve?

Why is the short-run aggregate supply (SAS)curve upward sloping?

Demonstrate graphically and explain verbally the comparison of the impact of a drop in the price level on the shape of the aggregate demand curve when the multiplier effect is positive to when it is zero.

Using an AS/AD diagram,demonstrate graphically and explain verbally the short-run impact on the price level and real output of an increase in the labor productivity schedule.

What are feedback effects,and how does the AS/AD model incorporate them?

Demonstrate graphically and explain verbally the case of an inflationary gap.Describe the forces in the economy that will result in the gap closing itself.

Explain why the long-run aggregate supply (LAS)curve is vertical.

What does it mean if the economy becomes dynamically unstable?

Explain why the aggregate demand curve is downward sloping.(As the price level falls,the quantity of real output demanded increases.).List five factors that might cause the AD curve to shift outward

What is the difference,in terms of the time frame of analysis,between Classicals and Keynesians?

Explain why the long-run aggregate supply (LAS)curve is vertical.What determines the position of the LAS curve?

Canada is the largest trading partner of the U.S.Suppose the U.S.economy keeps growing.What will happen to the AD curve for Canada?

Describe two ways in which the macro AS/AD model differs from the micro supply and demand model.

Keynes did not agree with the way the Classical economists described the workings of the economy.What was the essence of his thinking?

In 2008,the world experienced a global recession.Why would the U.S.be concerned about other parts of the world,particularly Japan,Western Europe,Canada,and Mexico,having recessions?

Assuming the economy is in long-run equilibrium,using an AS/AD diagram,demonstrate graphically and explain verbally the long-run impact on the price level and real output of an expectation by business executives of a recession in the near future.

Economics and Economic Reasoning

The Production Possibility Model, trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Thinking Like a Modern Economist

Economic Growth, business Cycles, unemployment, and Inflation

Measuring the Aggregate Economy

Growth,productivity,and the Wealth of Nations

The Multiplier Model

Thinking Like a Modern Macroeconomist

The Financial Sector and the Economy

Monetary Policy

Financial Crises, panics, and Macroeconomic Policy

Inflation and the Phillips Curve

Deficits and Debt

The Modern Fiscal Policy Dilemma

International Trade Policy, comparative Advantage, and Outsourcing

International Financial Policy

Macro Policy in a Global Setting

Macro Policies in Developing Countries

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